telexfree-logoOn the eve of Judge Landis’ decision that will decide whether Ponzi schemes are able to claim bankruptcy protection, lawyers acting on behalf of TelexFree affiliates have filed a class-action lawsuit in Nevada.

Filed on the 3rd of May in the Nevada Bankruptcy court, the class-action names TelexFree, its management, top promoters, legal and advisers, payment processors, banks and financial institutions as defendants.

Listed as plaintiffs are Waldemara Martins and Leandro Valentim “and those similarly situated”. Martin and Valentim are identified in the complaint as being TelexFree investor affiliates (participants in the pre-March 9 AdCentral ROI compensation plan).

Valentim and Martins’ complaint is based on the fact that the named defendants knew TelexFree was a Ponzi scheme, and did nothing to stop it. The filing of fraudulent 1099 tax forms is also raised:

In furtherance of their unlawful enterprise, TelexFree mailed fraudulent and inaccurate 1099 (Miscellaneous Income) forms to investors, possibly to create the illusion that they had made payments to investors.

The 1099 forms were provided long after the mandated January 31, 2014 deadline, and some after the April 15, 2014 filing deadline.

TelexFree falsely represented that investors had received income that they had in fact never received.

Here are the allegations laid out against the individual defendants and/or parties:

TelexFree Management (Merrill, Wanzeler, Costa, Craft and Labriola)

At all times material herein, Defendants Merrill, Wanzeler, Labriola, Craft and Costa (hereinafter sometimes collectively “TelexFree’s Management”) were responsible for the control and operation of TelexFree and its affiliated entities.

Moreover, TelexFree’s Management not only controlled the activities and operations of TelexFree, but also knowingly and willfully conspired to perpetrate, and did in fact perpetrate, the TelexFree Pyramid Ponzi Scheme with full awareness of its fraudulent and illegal nature.

James Merrill, Carlos Wanzeler and Steve Labriola are blasted for appearing in media that promoted TelexFree, Joe Craft is held responsible for ‘the existence of duplicative (TelexFree) accounting records containing egregious discrepancies

TelexFree Financial was incorporated by Co-Defendant Joseph H. Craft on December 26, 2013

TelexFree Financial was fraudulently set up for the purpose of sheltering funds rightfully belonging to the putative class.

As Chief Financial Officer for TelexFree, Inc. and TelexFree, LLC, as well as a certified public accountant, Defendant Craft, knowingly perpetrated the TelexFree fraud by, inter alia:

a. Overseeing TelexFree’s creation of falsified accounting records;

b. Failing to ensure that GAAP accounting methods were adopted and adhered to;

c. Fraudulently certifying TelexFree’s business operations and accounting practices as good and lawful, despite actual knowledge of their unlawful
and illegitimate nature;

d. Concealing the fact that the AdCentral Packages purveyed by TelexFree were actually securities; and

e. Concealing and absconding with investor assets.

Carlos Costa is also called out for helping to run TelexFree and perpetuate the fraud, in addition to his well-documented history of telling porky-pies:

Costa is videoed displaying an Insurance Notification representing that it was proof of coverage for investors’ returns; however, in actuality the document was a notification denying coverage.

Gerry Nehra and Richard Waak

During the course of TelexFree’s fraudulent scheme, (Gerry Nehra and Richard Waak) acted as legal counsel to TelexFree.

Attorney Nehra had previously acted as counsel to other multi-level marketing firms, which were forced, closed by federal and/or state authorities due to fraudulent pyramid and Ponzi schemes, including Zeek Rewards and AdSurfDaily.

Attorney Nehra’s extensive experience in multi-level marketing, and particularly his involvement with the Ponzi schemes involving AdSurfDaily and Zeek Rewards, armed him with the knowledge of what constitutes violations of United States securities law.

Indeed, Attorney Nehra was well aware that the use of semantics and obscured phraseology to obfuscate securities laws fails to legitimize TelexFree’s illegal Pyramid Ponzi Scheme.

Nehra even went so far as to send BehindMLM a cease and desist back in February 2013, demanding we take down our “TelexFree is a Ponzi scheme” analysis. I replied to Nehra’s email but received no answer.

A few months later he popped up at a TelexFree promotional event, where he gave the company his “legal blessing”.

Waak’s naming as a defendant meanwhile appears to be guilt by association,

As general partners of the Law Offices of Nehra and Waak, Attorney Nehra and Attorney Waak are jointly and severally liable for torts and obligations of the firm.

During the time that the Law Offices of Nehra and Waak provided legal counsel to TelexFree, Attorney Waak was Principal Attorney of the law firm.

During this time, Attorney Waak, as Principal Attorney of the Law Offices of Nehra and Waak, was charged with oversight of the daily activities of the law firm.

TelexFree’s Contract at Section 2.6.5 (m) mandates that Promoters are not to use the term investment with respect to the registration costs.

Co-Defendant and Company Counsel Attorney Gerald P. Nehra, through his affiliated companies (Law Offices of Nehra and Waak, Gerald P. Nehra, Attorney at Law, PLLC, and Richard W. Waak, Attorney at Law, PLLC), and under the direct supervision of Co-Defendants Richard W. Waak and Richard W. Waak Attorney at Law, PLLC provided this deceitful advice for the purpose of furthering perpetuating Defendants unlawful Pyramid Ponzi Scheme.

Given that it was Nehra’s face plastered on the TelexFree website and used to lure in new affiliate investors, I’m not too sure how strong the case against Waak might be.

That said, the complaint alleges:

The Attorney Defendants’ role and involvement in the TelexFree Pyramid Ponzi Scheme exceeded merely providing legal counsel because they knowingly acted to further and perpetuate TeleFree’s illegal Pyramid Ponzi Scheme, which caused Plaintiffs Waldemara Martins and Leandro Valentim and the similarly situated Putative class members to suffer economic loss.

The Attorney Defendants had actual knowledge that the TelexFree Business Model was a fraudulent Pyramid Ponzi Scheme.

Seeking to personally profit from TelexFree’s exploitation of the members of the putative class, Defendant Gerald P. Nehra drew upon his prior experience to aid, abet and play an integral part in TelexFree’s unlawful, unfair and deceptive acts and practices during times relevant to this complaint.

Attorney Nehru (sic) counseled TelexFree on methods to evade United States securities laws that were intended to offer, in part, protection from pyramid Ponzi schemes; all to enrich himself financially and serve his own selfish interests.

Attorney Nehra further encouraged TelexFree Investors to unknowingly participate in the evasion of federal and state securities laws.

The Banks and Payment Processors

Alleged to have provided ‘crucial financial services to TelexFree, which enabled TelexFree to carry on its Pyramid Ponzi scheme’, are the banks and payment processors TD Bank, Citizens Financial, Citizens Bank, Fidelity Bank, Middlesex Savings, GPG, IPS, and ProPay.

TelexFree’s financial services providers, including the aforesaid banking institutions and payment processing services providers, knowingly aided and abetted TelexFree’s Pyramid Ponzi Scheme by, inter alia:

a. Receiving transfers of funds from, and on behalf of, TelexFree in the course of TelexFree’s fraudulent business, despite knowledge of the fraudulent nature
of TelexFree’s business enterprise;

b. Receiving transfers of funds from TelexFree, its affiliated entities, and its executive officers, which transfers deepened TelexFree’s insolvency, despite
having knowledge of TelexFree’s actual or imminent insolvency at the time of such transfers;

c. Processing payments to, and on behalf of, TelexFree, including its affiliated entities and Management, in the course of TelexFree’s fraudulent business,
despite knowledge of the fraudulent nature of TelexFree’s business enterprise; and

d. Otherwise enabling the TelexFree Pyramid Ponzi Scheme to expand and continue by providing necessary financial services to TelexFree, despite actual
knowledge of fraud on the part of TelexFree.

“IPS” are i-Payout Systems, who are specifically called out for holding around $30 million in funds for TelexFree, which was used to add legitimacy to a telecommunications application filed in Washington:

IPS provided TelexFree with a service titled “e-Wallet,” which was used by TelexFree to process electronic transfers of funds by Investors to TelexFree.

According to a TelexFree balance sheet, dated December 31, 2013, posted by the Washington State Utilities and Transportation Commission, as of December 31, 2013, TelexFree claimed $31,640,192.30 in assets then held by IPS (under the brand name “e-Wallet”) on behalf of TelexFree.

Back in October 2013, i-Payout got in contact with BehindMLM to express their objection to our coverage of TelexFree. The payment processor stated it had conducted “full due-diligence” on TelexFree, and found the company to be ‘compliant with all US laws‘.

We emailed them back challenging their position, but only received the following tin-can reply in response:

Hi Oz,

Thank you for getting back to us. We appreciate and respect your opinions. As we have stated before, we would love to be a resource for you in relation to any and all factual information as it relates to i-payout. Feel free to reach out to us with any further questions regarding i-payout.

Evidentally, TelexFree being a Ponzi scheme wasn’t part of the “factual” narrative i-Payout used to justify their involvement with TelexFree at the time.


Spanning a whopping 23 claims for relief, the affiliates who filed the suit are asking for

  • rescission and/or compensatory damages as a result of (the defendants) wrongdoing, in an amount to be proven at trial, including interest
  • an award of actual damages, compensatory damages, statutory damages, and statutory penalties
  • an award of punitive damages
  • costs
  • an award of interest and
  • the appointment of a Receiver (to handle affiliate payouts)

My Thoughts

The odd spelling mistake aside, Martins and Valentim’s complaint is well written and presents a compelling case. My own personal feeling though is that it is likely to have been filed somewhat prematurely.

In about twelve hours Judge Landis is expected to hand down a ruling on the future of TelexFree’s attempt to negate criminal liability using the Nevada Bankruptcy Court. A decision that very well may have significant impact on any class-action lawsuits against TelexFree (I’m currently aware of only one other at this stage).

At last Friday’s mammoth May 2nd hearing, a lawyer representing some affiliates was given permission to speak, but was quickly shutdown by Judge Landis when it became apparent he was unable to frame his client’s representation within the context of the bankruptcy proceeding.

I suspect, with things currently up in the air that this class-action isn’t going to be all that effective. At least not until the regulatory action in Massachusetts has evolved into a clearer picture. Even on May 2nd new regulatory evidence was surfacing, after it was revealed the US Attorney’s Office had issued TelexFree some thirty-odd forfeiture notices to seize their assets.

I sort of understand why the case might have been filed now, as there’s little change the defendants are going to be left with much after the regulators are done with them, but on the other hand it’s unlikely that they’ll be given any special treatment over the rest of TelexFree’s investors (which the regulatory actions seeks to address).

Guess we’ll have to see what happens tomorrow…


Footnote: You can read the entire class-action complaint over at the KCC website. Additional coverage of the class-action is over at Patrick Pretty (be sure to read the comments).